The latest issue of Time magazine has the story flagged on the cover: “The End of Easy Money”
The story, by Justin Fox, says
Now, though, it’s history. With each new market minipanic this year, interest rates have gone up a tad, lending standards have gotten a little tighter, and the easy-money era has receded further. Rates are still low by historic standards, and some kinds of loans are still cheaper than they were last summer. But the economy was growing at more than 3% then. This year it has sputtered. Interest rates are supposed to sink when that happens. They haven’t.
But here’s the problem—long rates are falling. The ten-year rate is now down to only 4.91% on the bloomberg machine outside my office (at roughly noon). And the latest mortgage rate for 15-year mortgages is 6.38%…that’s compared to 6.39% for July 2006.
Now, there’s no doubt that subprime woes are going to tank the subprime mortgage market. And some of the riskier CDOs are going to have real problems.
But the question is whether the difficulties in these particular markets will spill over to other parts of the credit market. A look back at the last credit crisis—the dot.com bust—suggests maybe not.
In that case we had the Enron and Worldcom bonds going under, combined with many losses in the IPO market. Not surprisingly, venture capital tanked for several years after that.
But one of the big surprises was that the rest of the credit markets were just fine, including high-yield securities and home mortgages. In fact, there was no overall credit crunch.
So it is perfectly possible that we could have devastation in one part of the credit market, while borrowing continued along merrily in other parts. In fact, that’s what you would expect in an efficient credit market.
More about this later.